Introduction:
The overwhelming majority of cases settle before trial and the entire court system is geared to facilitate settlement since the cost of a trial to the State is significant. Mandatory settlement conferences, persuasion by judges, and encouragement of mediation and arbitration are some of the tools utilized to attempt to achieve a settlement.
Of course the most powerful tool to promote settlement is to utilize the German system in which the prevailing party receives reasonable attorneys fees incurred in bringing the action. Few parties would risk having to pay the fees of both sides unless they were truly confident in their case and Germany has much less wasteful litigation than the United States.
But the United States seldom allows such methods as to attorneys fees and minus agreement of the parties, in most instances each party must pay its own attorneys fees.
California does have a variation of the attempt to encourage settlement by having a prevailing party receive costs from the losing party. “Costs” are carefully defined, as described below, and include such items as filing costs, experts costs, etc. They do not include attorneys fees.
Such offers are known as “998 Offers” after the section of the California Code of Civil Procedure that describes the process. This article shall give the basics of the mechanics of “998 Offers.” The reader should first review our article on American Litigation.
The Law:
1. Section 998 of the Code of Civil Procedure provides that, not less than 10 days before commencement of trial, any party to an action "may serve an offer in writing upon any other party to the action to allow judgment to be taken in accordance with the terms and conditions stated at that time." The offer is deemed withdrawn if not accepted before trial commences or within 30 days, whichever occurs first.
2. If the offer is accepted, the accepted offer is filed with the court and judgment entered accordingly. If the offer is not accepted, and the person rejecting the offer does not obtain a trial result better than the offer, certain cost-shifting mechanisms kick in. The prospect of such cost-shifting is hoped to encourage settlement of lawsuits before trial. T.M. Cobb Co. v. Superior Court (1984) 36 Cal. 3d 273, 280.
This deceptively simple statute has existed in some form in California since 1851 and, although modified over the years, remains essentially unchanged in substance. Taing v. Johnson Scaffolding Co. (1992) 9 Cal. App. 4th 579, 585. However, the legal environment in which it operates has changed substantially in 125 years, and numerous court decisions have inserted crucial limitations on the statute
a. The Statutory Scheme
Section 998 is straightforward, but varies according to whether the offer comes from a defendant or a plaintiff.
Defense Offers. Under Section 998(c), if an offer made by a defendant is not accepted and plaintiff fails to obtain a more favorable judgment, the plaintiff
(a) is not entitled to recover court costs (despite being a "prevailing party"), and
(b) must pay the offering defendant's costs from the time of the offer.
In addition, the court has discretion to award all of defendant's costs from the date of filing of the complaint, and to award a "reasonable sum" to cover the incurred expenses for expert witnesses used by the defendant in the preparation and trial of the action.
Under Section 998(e), if these awarded costs actually exceed plaintiff's recovery, the court is directed to enter a judgment against plaintiff in favor of the defendant for the difference. Thus, the stakes for a plaintiff can be quite substantial when faced with a defense 998 offer.
Plaintiff Offers. Section 998(d) provides that if plaintiff's 998 offer is refused and defendant fails to obtain a more favorable judgment, then the court may award (in addition to the costs that plaintiff will already be eligible to recover as "prevailing party") a "reasonable sum" to cover plaintiff's incurred expenses for expert witnesses. In addition, Civil Code Section 3291 provides pre-judgment interest on plaintiff's judgment at the legal rate of 10 percent commencing on the date of plaintiff's first 998 offer which is exceeded by the trial judgment.
b. Mechanics:
The Offer Must Specifically Refer to Section 998. A letter merely stating, "This letter is intended as an invitation to your clients to settle their disputes with my clients," while making no reference to Section 998, was rejected as insufficient to trigger the statutory cost-shifting in Stell v. Jay Hales Development Co. (1992) 11 Cal. App. 4th 1214, 1231-32.
Only Reasonable Offers Are Eligible. The decisions in Pineda v. Los Angeles Turf Club, Inc. (1980) 112 Cal. App. 3d 53, 63, and Wear v. Calderon (1981) 121 Cal. App. 3d 818, 820-21, have recognized a threshold requirement of "realism" or "good faith" for 998 offers. Pineda affirmed rejection of a $2,500 defense offer in a $10 million wrongful death case, and Wear reversed a Section 998 cost-shifting award following a defendant's offer of $1 in a personal injury case. "[T]he pretrial offer of settlement required under section 998 must be realistically reasonable under the circumstances of the particular case. Normally, therefore, a token or nominal offer will not satisfy this good faith requirement . . . ." Wear, 121 Cal. App. 3d at 821.
The decision in Elrod v. Oregon Cummins Diesel, Inc. (1987) 195 Cal. App. 3d 692, 698-70, takes this principle farther, and states that whether a 998 offer is reasonable also depends on whether the adverse party knows, or reasonably should know, the information that makes it reasonable. Thus, according to the Elrod court, even "dynamite" information contained in defense files that should lead to a defense verdict will not support a low-ball 998 offer unless the plaintiff knows about or has the opportunity to discover this information (whether or not the opportunity is actually used). In the same year, Culbertson v. R.D.Werner Co. (1987) 90 Cal. App. 3d 704, 708-11, upheld the validity of a $5,000 defense 998 offer against a $1.5 million demand in a personal injury case, even though workers compensation liens against plaintiff's recovery would have left the plaintiff with nothing if the offer was accepted. The court pointed to a number of factors that would lead to a reasonable expectation of a defense verdict. Id. at 707.
Only Unqualified Acceptance Will Count if Want to Accept the 998. Previously, conditional acceptance of a Section 998 offer, containing terms or conditions materially different from the original offer, was viewed as a counteroffer that terminates the ability to accept the original offer. Glende Motor Co. v. Superior Court (1984) 159 Cal. App. 3d 389, 398. That case has been overturned by the Poster V Southern Ca. Rapid Transit District case at 52 Cal. 3d 266 which allows counteroffers to be made without voiding the 998 since offers and counteroffers are common during settlement discussions, but if one wants to utilize the 998 binding settlement offer, then such offers and counters must cease within the thirty days and the 998 offer be accepted without changes.
Relinquishment of Outside Claims Cannot Be Required. A defense 998 offer that provided not only an end to the pending litigation but a release of all other potential claims against the defendant, its attorneys, and its insurers, was rejected by the court in Valentino v. Elliott Sav-On Gas, Inc. (1988) 201 Cal. App. 3d 692, 701. Although the court was troubled by the release on policy grounds, it also found that the value of the other released claims was sufficiently imponderable that the court could not realistically measure the value of the offer compared to the trial result.
The 998 Offer Must Be Capable of Valuation by the Court. A plaintiff's 998 offer of a structured settlement (lump sum together with annuity for the life of the plaintiff) was held inadequate to trigger Section 998 cost-shifting because there was no evidence of the present value of the annuity and therefore no means to compare the 998 offer to the trial result. Hurlbut v. Sonora Community Hospital (1989) 207 Cal. App. 3d 388, 408-09. The court suggested that expert testimony to establish present value might have solved the problem. Id. at 409.
c. Special Rules for Multiple Parties
The cases applying Section 998 in multi-plaintiff or multi-defendant settings are confusing and inconsistent, and substantially limit the effectiveness of the statute in such cases.
In General, Separate Offers Must Be Made to Multiple Parties. Case law makes 998 offers from or to multiple adverse parties vulnerable to challenge unless
(a) they set out individual allocations of the proposed judgment to each party, and
(b) they provide for individual acceptance without consent of the other parties affected.
These doctrines find their origin in two early cases. Randles v. Lowry (1970) 4 Cal. App. 3d 68, 74, set the stage in its holding that a defense offer under Section 997 (the predecessor to Section 998) to three plaintiffs, with no designation of how the proceeds should be divided among them, was a "nullity" because of the failure to make such allocation. Accord, Meissner v. Paulson (1989) 212 Cal. App. 3d 785, 790-91. A few years later, Hutchins v. Waters (1975) 51 Cal. App. 3d 69, invalidated a 998 offer by a defendant to two plaintiffs in which a precise allocation was given, but neither could accept the offer unless the other also accepted, holding that a valid offer could not require the consent of all parties before any could accept. Accord, Santantonio v. Westinghouse Broadcasting Co. (1994) 25 Cal. App. 4th 102, 112-114.
Subsequent decisions have addressed a variety of variations on this theme. Thus, for example, it has been held that a 998 offer made by multiple plaintiffs with severable causes of action must include an allocation among themselves in order to be valid. Gilman v. Beverly California Corp. (1991) 231 Cal. App. 3d 121, 126; Hurlbut v. Sonora Community Hospital, supra, 207 Cal. App. 3d at 410.
Joint offers by defendants without internal allocations of liability have been allowed to stand where the court believed the claim was joint and indivisible. Stallman v. Bell (1991) 235 Cal. App. 3d 740, 745-77; Brown v. Nolan (1979) 98 Cal. App. 3d 445, 451; cf. Winston Square Homeowner's Assoc. v. Centex West, Inc. (1989) 213 Cal. App. 3d 282, 294 (defendant found not liable on non-joint claim was entitled to rely on joint 998 offer by defendants even though not broken down). This is obviously an area of some danger, however, and defendants contemplating a joint offer should thoroughly review the relevant case law.
It Is Not Necessary to Make Offers to All Adverse Parties. A defense offer to only one plaintiff was upheld in Stiles v. Estate of Ryan (1985) 173 Cal. App. 3d 1057, 1064.
Realities of the 998:
Except in those cases in which experts or deposition costs are truly high, the amount that can be “won” in a 998 offer is usually not enough to spark settlement. The highest cost in most cases is the attorneys fees and many feel that a better approach to spark settlement is to offer to the other side to stipulate that the prevailing party will receive reasonable attorneys fees. Even if not accepted, their reaction will do much to tell you whether they are confident in their case.
A 998 can also commence the settlement discussions since opposing counsel will have to present it to their clients and discuss the pluses and minuses. If there is any desire to settle the matter reasonably, the 998 can at least cause the issue to be placed on the table.
But the economics do not make it the critical factor in the overwhelming majority of cases. Typically, for every hundred thousand dollars in fees, one may have fifteen thousand dollars in costs. By the time the 998 is received, many parties are already so committed to the expense of the litigation that the chance of having to pay a few tens of thousands more will not compel them to rethink their position.